These results underscore the enduring strength of Mainstreet's value-added business model and countercyclical growth strategy, where we have proven our ability to acquire and stabilize underperforming assets in order to provide real value to shareholders.
At the same time, a series of favorable macro trends have created a positive operating environment for Mainstreet. High commodity prices and a continued post-pandemic recovery continue to drive a sharp economic rebound in
In Q3, Mainstreet generated significant profit on the sale of properties that were acquired during COVID-19 as distressed assets for the explicit purpose of resale (136 broken condo units). The profit on sale of
As we enter the last quarter of 2022, the high rental season of the year, we believe positive macro trends will provide ample opportunity to pursue our 100% organic, non-dilutive growth model, backed by our current liquidity position of approximately
Despite a positive operating environment for Mainstreet, the war in
Our management team has taken steps to minimize our exposure to such fluctuations, including the decision a few years ago to pay higher up-front borrowing costs on
Inflationary pressures meanwhile increase the cost of everything from labour to materials, raising our operating costs. Renovation and maintenance costs have increased in line with supply shortages for materials. To cushion against such increases, Mainstreet has long established direct contracts with both domestic and foreign suppliers to attempt to secure stable supply links.
Major fixed expenses like property taxes, insurance, and utilities have increased due to government policy. Carbon taxes, which place the financial burden on property owners, are scheduled to increase on an annual basis. We have addressed higher energy costs by entering various longer-term natural gas contracts, pursuant to which Mainstreet currently pays well below current spot prices.
Regardless of our widespread efforts to counteract inflation and rising interest rates, higher costs erode our operating margins and negatively impact our bottom line. Some of the financial burden will ultimately be passed onto tenants through rental increases. However, we are confident Mainstreet will remain the leading provider of quality, affordable housing in
As we look ahead, Mainstreet believes macroeconomic volatility could continue to keep inflation elevated, potentially leading to further interest rate hikes. To guard against such increases, our management team has ensured that the vast majority of Mainstreet debt is set at long-term fixed rates (see Challenges section).
Further, management believes that inflationary periods tend to be transitory in nature. Should interest rates once again fall sometime in the coming years, Mainstreet will benefit not only from more competitive acquisition costs, but also lower interest expenses (resulting in higher FFO) on refinancing after stabilization.
As the acquisition environment enters a period of transition, we continue to see risk-adjusted opportunities for growth, supported by our sizeable liquidity position. Higher interest rates could force more distressed sellers onto the market, which would create more opportunistic acquisition opportunities and offer considerable potential for non-dilutive growth. As always, we will maintain our strategy of counter cycle growth by acquiring assets only when it prioritizes true value creation. For example, Mainstreet acquired a distressed property in
Meanwhile, we expect that Mainstreet's strong Western Canadian asset base, reaching from
Positive migration trends should also continue to create ideal operating conditions for Mainstreet in the last quarter of 2022 and into the 2023 fiscal year. In-migration into
We also anticipate that immigration level will continue to rise and more foreign and domestic students will return to in-person classes, two demographics that form a substantial portion of Mainstreet's client base. The Canadian government's goal to attract 1.2 million immigrants over three years should be supportive of that trend. We expect that an increase in foreign and domestic students will be particularly supportive of our
We expect our
Current market conditions also create opportunities to extract more value out of existing assets. Mainstreet vacancy rates dropped in Q3 2022, but we still see ample room to continue repositioning units in coming quarters to further lower vacancies and boost operating income. In Q3 2022, 2,224 units out of a total 15,825 (14% of our portfolio) remain un-stabilized, largely due to our high rate of counter-cyclical acquisitions over the past two years.
Lastly, a chronic housing shortage, high interest rate and inflation will continue to make owning a home unaffordable for average Canadians. This reinforces Mainstreet's conviction that inner-city, workforce affordable rental housing will remain an essential and safe asset class in
- Pursuing our 100% organic, non-dilutive growth model: Using our strong potential liquidity position, estimated at
$300 million for the remainder of fiscal 2022 (including$43 million cash-on-hand, and a$130-million line of credit secured by$312 million in clear title assets), we believe there is significant opportunity to continue acquiring underperforming assets at attractive valuations. - Boosting NOI: As of Q3 2022, 14% of the Mainstreet portfolio was going through the stabilization process. Once stabilized, we remain confident same-asset revenue, vacancy rate, NOI and FFO will be meaningfully improved. We are cautiously optimistic that we can boost cash flow in coming quarters. In the B.C. market alone, we estimate that the potential upside for NOI growth is approximately
$20 million , which mainly represents leveraging our mark-to-market gaps. Management also expects that strong immigration and economic recovery inAlberta andSaskatoon would accelerate our NOI catch up. - Buying back shares at a discount: We believe MEQ shares continue to trade below their true NAV, and that ongoing macroeconomic volatility could intensify that trend. We will therefore continue to buy back our own common shares on an opportunistic basis under our normal course issuer bid.
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